Muni Market Mobilizing with Post-Hurricane Bonds

By Michael Aneiro

We’re seeing the first signs of muni-market mobilization in the aftermath of Hurricane Sandy with an eye toward making specific accommodations for storm-hit communities and businesses.

First, as Jeannette Neuman reports in today’s Wall Street Journal, states and cities in the storm’s wake are petitioning Congress to let private companies and nonprofit groups access the muni market to borrow as much as $20 billion to put toward recovery efforts. But this initiative comes just as Washington is locked in a cost-cutting battle ahead of the fiscal cliff:

Local governments and a coalition of attorneys, bankers and lobbyists who could benefit from the fees generated by the new bonds are calling on lawmakers to create Sandy “recovery bonds.”

These securities—called “conduit” or private-activity bonds—would allow states and cities affected by Sandy to borrow on behalf of private companies and nonprofits, lowering borrowing costs for entities that otherwise might turn to corporate bonds or bank loans.

State and local officials say the tax incentive is necessary because the federal government and private insurers typically don’t reimburse 100% of losses, and many home and business owners don’t have flood insurance.

But while past recovery-bond initiatives have sailed through Congress, mounting concerns with the federal debt could make Sandy bonds and their tax-exempt status a tougher sell. And some past bond issuers have been criticized for not using the proceeds as they were intended.

While that plays out, New Jersey is already looking to sell $2.6 billion of short-term bonds that come with an unusual bank backing, as Kelly Nolan and Mike Cherney report:

J.P. Morgan Chase (JPM) is offering to buy any notes it is unable to sell at or below a certain interest rate, in an effort to help the state as it continues to struggle with superstorm Sandy’s devastation.

Specifically, J.P. Morgan will buy any notes in New Jersey’s deal if it isn’t able to sell them at an interest rate of 0.35% or less, according to bond-offering documents, a move that puts an upward limit on borrowing costs for the state.

“It is by no means normal,” said Craig Mauermann, who manages the roughly $825 million BMO Tax-Free Money Market Fund and $800 million BMO Ultra Short Tax-Free Fund. “J.P. Morgan is really stepping up to the plate…they are basically taking any sort of market risk off the table” for New Jersey, he said.

A spokesman for New Jersey Treasurer Andrew Sidamon-Eristoff said that “these were by far the best terms” the state received when it was looking for an underwriter for its debt.

For its part, Moody’s, which had already weighed in with its thoughts on muni market storm implications, just did so again:

The damage from Hurricane Sandy will pressure affected issuers’ budgets and expose the most heavily impacted entities to a number of operational and budgetary risks that could take a year or longer to play out. Overall, we expect credit quality to remain unchanged for most issuers, affirming the fundamental resilience and security of the sector generally. Though a large number of entities were affected, some significantly so, we only expect a handful of possible rating actions directly related to the hurricane.